In Chapter 4, some of the tax obstacles arising in the cross-border movement of companies were examined, the emphasis being firstly on direct investment. It was reiterated that EU law does not impose any immediate obligations on Member States on how to structure their corporate tax systems in terms of rates, taxable base, depreciation and so on. What EU law does is to prevent Member States from imposing rules that hinder a domestic company from carrying on its business in another Member State (home State obstacles), or rules that hinder a non-resident company from carrying on its business in a similar way to domestic companies (host State obstacles). As far as companies were concerned, issues such as expenses in foreign holdings and cross-border loss relief were considered. As far as permanent establishments are concerned, apart from different treatment compared to subsidiaries, issues such as loss relief, notional expenses, attribution of profits were examined.

Considers source country taxing rights under tax treaties. Initially follows the schedular approach of the OECD Model, the distributive provisions of which give source countries full taxing rights (immovable property, business, employment), limited taxing rights (dividends, interest) or no taxing rights (royalties, capital gains, other income). Source country rights, even if full, may be limited by treaty nondiscrimination provisions, which are compared to EU fundamental freedoms. Particular attention is devoted to taxation of business profits, including source country subsidiaries and permanent establishments. Problems inherent in the dual fictions of the authorised OECD approach to taxation of permanent establishments are noted. The second heading considers source country deductibility of payments made to non-residents. Deductibility of these payments can lead to base erosion while denying deductions raises issues of discrimination. The final heading first considers two fundamental features of payments that are critical for source country taxation; quantification and characterisation. Quantification raises issues of transfer pricing. Varying taxation based on characterisation raises issues of fungibility of payments, particularly in the definitions of ‘dividends’, ‘interest’ and ‘royalties’. These issues crossover in excessive interest payments and thin capitalisation. Finally, the chapter deals with reconciliation of provisions under the schedular approach.